Governance concerns at News Corp

The Australian Financial Review’s revelations that a
News Corporation
subsidiary, NDS, engaged in piracy that damaged its pay TV rivals in Australia, was involved in a runaway pay TV piracy operation in North America, and withheld an anti-piracy fix from a customer in the US, underlines the importance and value of independent journalism. The report, supported by 14,000 emails and a four-year global investigation by Financial Review journalist Neil Chenoweth, shines a public interest spotlight on the murky internal workings of a part of News Corporation, one of Australia’s largest, most successful global companies.

That spotlight came about because, in the tradition of independent journalism that this newspaper is known for, the Financial Review invested in the extraordinary investigative skills of Chenoweth, a world expert on News Corporation.

His detailed, blow-by-blow account of the internal workings of Israeli-based News Datacom Systems, known as NDS, used material that NDS sought to suppress as confidential and fought to keep out of the US courts, but which has been confirmed as authentic. Despite that effort, there is more to be found out. The Financial Review has no intention of forming a judgment on the legality or otherwise of the practices uncovered in the emails and through Chenoweth’s investigations. This investigation is not motivated by a desire to damage a rival publisher. We are simply doing our job of following the story in the public interest.

NDS was formed in the late 1990s for the legitimate purpose of protecting News Corp’s intellectual property and its pay TV revenue from rampant piracy that was damaging its operations.

Pay TV operators issued smartcards to subscribers who then slotted them into set-top boxes in their home. But these cards can be hacked. The card and set-top boxes unscramble the encrypted signals from the provider, and block access to channels that the subscriber has not paid for. At the time, pay TV encryption was a rapidly developing frontier technology and pay TV providers were in a race to keep ahead of the hackers and the pirates.

The information uncovered by Chenoweth suggests that NDS attacked the pirates and prosecuted them, but in so doing obtained encryption codes for the cards operated by rivals. Using that knowledge, it promoted a wave of high-tech piracy that damaged Austar and Optus, the pay TV rivals of Foxtel, which is 25 per cent owned by News Ltd.

Foxtel is now poised to buy
Austar
. The piracy cost the ­Australian pay TV companies millions of dollars a year and undermined Austar’s finances. As well as harming rivals by ­fostering piracy, NDS also appears to have withheld a piracy fix from client DirecTV for 15 months just as News Corp chairman
Rupert Murdoch
was set to buy the company in early 2000. This cost DirecTV millions of dollars in revenue, depressing the company’s value. NDS was paid more than $90 million to ­provide security to DirecTV.

It is not clear if top News Corporation executives knew of the NDS dirty tricks. NDS reported to the office of Mr Murdoch. The chief operating officer of News Ltd,
Chase Carey
, was an NDS director and oversaw NDS in the late 1990s. It may be that NDS displayed elements of a rogue operator within the News Corp stable with an agenda that did not always accord with that of its parent.

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At least until now, there has been no known link between the pay TV piracy allegations and the UK phone hacking scandal that has badly damaged News International, the UK arm of News Corp. The egregious phone hacking by journalists and private investigators at News Corp newspapers and other media companies has no known counterpart in Australia.

The evidence uncovered by Chenoweth, however, reveals that NDS paid £2000 to Surrey police for information. Surrey police are at the centre of the UK phone hacking inquiry. In addition, the emails suggest that NDS intended to procure phone records in Australia illegally. The Australian Federal Police has confirmed that it has been working with UK police investigating News International since July last year, but the content of the investigation is not known.

Under Australian law at the time, hacking and piracy of smartcards was not illegal. But the evidence uncovered by Chenoweth raises legitimate questions about corporate governance, accountability and trust at an important public corporation that go beyond the question of legality. News Corp strongly disputes the conclusions of the Financial Review’s investigation.

However, this episode underscores the crucial role of independent journalism, and the importance of allowing the media to play its role without government or regulatory control or interference. The Financial Review believes the media should remain unfettered to pursue, in the public interest, the right to know. To that end, we have posted thousands of emails related to our report on afr.com and welcome further investigation into the story they tell.